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Here are the types of companies that will qualify for invoice factoring:

Any company that invoices another company or government agency for work completed.

So retail selling to consumers will not, consignment sales will not, anything to do with real estate will not, restaurants, gas stations, cellular phone stores won’t be able to qualify.

Usually a service is provided or a product is delivered. This can happen on an ongoing basis or a single event. What determines the ultimate funding decision is the creditworthiness of the account debtor aka the customer. The factoring company will go through public records to find out what credit may be available given the customer’s credit history.

So if your company isn’t very strong financially, but your customer is a great big company, no problem we can fund the invoice. This is good for you and us. You will know up front who you are extending credit to and the likelihood that the invoice will get paid on time.

In theory, as you begin to become more successful and start getting bigger and better customers, they will require payment terms as a condition of the sale. By factoring the invoice you have access to that money before the customer pays their bill.

When calling up a factor to discuss your business, it helps to get the names we call things in the factoring industry right. Like any industry, we use particular words that universally mean the same thing no matter which factoring company you might be speaking to, like ours.

The most prevalent distinction is, who are you and who are you selling to? This is how a factoring company talks about this so it’s easy to follow;

The client – this is you who are receiving the services offered by the factoring company. Our client is the one who applies for factoring and uses the capital to grow their company.

The customer – this is who you, the client, are selling to. Your customer has to be approved for credit availability. A credit check is done by the factor to determine how much of an advance the factor is willing to provide. The customer can also be called the account debtor to make sure everyone knows which party we are discussing.

Over the years I have spoken to many investment bankers and software developers who have looked into using technology to automate the factoring process. They have found that parts of the factoring process can be automated, but the very nature of why a business owner would choose to use factoring and how exactly a factor sees the relationship makes it extremely difficult to automate.

Sure if the factoring transaction is plain vanilla with no wrinkles or variables it can be done. Very large organizations like UPS and Amazon are seeing that putting their money to work lending it to their customers and vendors has a great return. But the parameters and qualifications to use their money is not a one size fits all situations. Even some institutional banks have forms of invoice factoring departments who offer working capital through A/R advances, again the terms and conditions are fairly stringent.

There are plenty of small businesses who might have weak financial statements, past tax issues, bad FICO scores, and odd business models that can’t qualify for the plain vanilla types of factoring. Many of our clients have contracts that can change from one customer to the next. It’s the unfortunate reality of business today – the large customer makes the rules. So if you want to sell to a big customer you have to abide by their terms and conditions.

A good factoring shop is adept and going with the flow in these situations. We know how to figure out the best method to provide notification to the customer, verifying an invoice with the payables department of a huge conglomerate and reacting to problems when an invoice is unpaid. There is no computer code that can catch all the day to day audibles being called on a given play. Is the invoice we made an advance on properly secured? Has our client been up to date on their payroll taxes?

Factoring is a client leveraging the factors’ ability to borrow, and the factor using the invoices as short term collateral to pass that ability to borrow on. A service charge is involved and so getting good service should be in your interest.

One of the issues you must consider when it comes to invoice factoring as a potential business financing tool is knowing your profit margins. Whenever you pay interest on capital you secure from outside sources, like a factoring company, you must first determine whether you can afford the added expense. It is a good idea in any case to know exactly how much profit you derive from each sale you make. If it is a product oriented business it should be relatively easy. Deduct the cost of the product before sale from the sales price minus all the incidentals; shipping, taxes, commissions, business overhead etc. It is also a good idea to work with your accountant to get a fixed percentage of the sale that represents your â€œoverhead costsâ€ such as rent, utilities, office handling.

With a service oriented business it is slightly different, but if you treat an hourly wage as a product you can get an idea of the costs involved with your jobs. Another benefit of going through this exercise is figuring out exactly what it is you do that is the most profitable. Obviously you want to focus on activities or products that are have the most profit potential. When using receivable factoring, the discount rate for providing the cash flow to help you grow your business will be an added cost against the net profit we are discussing here. For example if your company is a high volume low margin enterprise, factoring may not be suitable financing. So knowing what your profit margin is will allow you to make the right decision when thinking about using an invoice financing as a tool for growth.

The phone keeps ringing, the emails keep coming, but we need to agree on some basics.

A factoring company provides financing by making advances on invoices to creditworthy customers. An invoice is defined as a product or service that has been delivered or completed (100%) and accepted as due by the customer.

– So if you need money to open a restaurant â€“ a factoring company canâ€™t help
– Any type of retail store that sells to consumers â€“ maybe try a home equity line
– Need money for Anything related to real estate property â€“ again, not for a factoring company
– You’re an agent who wants money in advance of commissions – there are a few specialty places that do that, but generally commissions are not “invoices”.
– You have a contract but need up front money to get it going â€“ this is technically mobilization capital
– Your company has annual contracts and you want money today for funds that will be collected over the next year â€“ a factoring company purchases 30 day invoices that cannot age more than 90 days
– No equipment, no inventory, no proforma or pre-billing
– And we definitely cannot pay to help a relative of a deposed government official from a foreign land.

An important part of the invoice verification process that factoring companies use prior to making an advance on the accounts receivable is to determine that the customer is not crediting any monies off their payment. When the factor finances an invoice they want to make sure 100% of the total invoice amount will be paid by the customer directly to the factoring company. This may require the customer in certain situations to sign off on the invoice stipulating that they have no intentions of deducting anything from their payment. For example, deducting amounts for work uncompleted or products that have not been delivered.

Because we are working off pieces of paper, verifying the invoice is real with each customer is primary to the overall factoring process. Although every factoring company handles this slightly differently, it should be handled as expeditiously as possible without unnecessary complications to the normal business routine of our clientâ€™s customer. There are usually one of three methods of verification, a simple email or fax, a phone call to the accounts payable department of the customer and then in particular situations an estoppel letter signed by the customer declaring the invoice will be paid and there are no credits or set-offs. This usually occurs in situations where the invoice might be considered a pre-bill, where the work has not actually been accepted yet.

For the most part, the verification is routine and can be made easier by the factoring client letting the customer know that their financing partner will be contacting them as part of the funding process.

D.C. based attorney David Tatge helped author a comprehensive book on called American Factoring Law. As a companion to this volume he has prepared this 30 page Introductory Discussion on The History Of Factoring focusing on an overview of the roots of early American factoring, with principal emphasis on the business practices of textile, corn and hop factors in England in the 14th-17th centuries.

The history of invoice factoring can be traced back to the Mesopotamians, who are credited with being the cradle of civilization and the first to generate business code structures and government regulations for commerce. Experts have evidence that proves 4,000 years ago, the Mesopotamians also created the concept of factoring. Following Mesopotamia, there is evidence that the Romans sold promissory notes at discounted prices. Roman merchants also enlisted the services of collectors to settle trade debts. But factoring as we know it today got its start in the Middle Ages.

Bank financing might not be the only option to funding a company in growth mode. Although banks usually offer the lowest cost of capital, it comes with strings that may very well inhibit this growth in certain situations. If a company starts small and goes big in a very short period of time, a bank is not set up to handle what they would consider extreme or fluctuating revenue growth.

Other sources of capital may include;

1. Sales â€“ There is no better way to capitalize a company than sales and profit. Increased sales with healthy profit margins is the premium method to build a company. But along with more revenues comes the equally as important skills to apportion cash flow where it is needed.

2. Customers â€“ Giving customers terms for early payment and having internal processes to keep those payments timely is another great way to fund a company. Many businesses do not get invoicing out quick enough and focus on collections well enough to help with their growth.

3. Suppliers â€“ Building credit with suppliers is another cost effective way to utilize cash flow in order to maintain a strong growth curve. By applying for credit, making timely payments and over time asking for credit increases, a company can get positive input on the radar of credit reporting agencies.

By the time you have optimized these sources well enough, considering other resources may be beneficial. Financing the purchase of equipment through leasing is a good way to spread the payments over time. Depending on the business model, in certain situations where the upside of the growth potential is attractive enough, selling equity in the company by way of angel or venture funding may be available. This avenue is, in a relative sense, costly in the long run and extremely difficult to obtain.

Mobilization capital is money up front to start a contract. This type of capital is only available from commercial sources to companies with a good strong balance sheet who have been operating for many years and have a positive history of performance both with what they do, and who they do it for. But if a company can get the contract started, then the possibility of receivable financing becomes available. Also known as factoring invoices, a business may get an advance today on an invoice that will be paid by a customer 30 â€“ 40 days later. The benefit is the business can pay its bills now and continue to grow based on the creditworthiness of their customer, in this case the government.

The object is to think creatively about funding a business and to utilize the most efficient tool for each situation.

It is becoming more frequent that factoring companies end up working in conjunction with banks to provide working capital to commercial borrowers. In most cases, the bank, or senior lender has an existing facility in place and has filed the required UCC-1 on the business assets as the collateral for the loan. The financing statement on the accounts receivables holds the borrower from using their invoicing to access more working capital. In certain situations where, the borrower has been current on their bank payments – may have additional assets, or are willing to make a substantial payment on the outstanding loan, a unique arrangement can be made between the bank and factoring company. This arrangement is called an â€œinter-creditorâ€ agreement. It is negotiated between the two lenders for the purpose of bringing cash flow to the client. It allows the factoring companiesâ€™ position on the specified receivables to prime the banksâ€™ position. After the factoring company makes advances on creditworthy invoices, it can rest assured the collateral has been secured properly. Depending on the banks willingness to move forward with this arrangement, it can be a life saver to a struggling company who is badly in need of working capital.

It appears that all the economic clouds are gathering to form a perfect storm for receivables factoring. The previous down cycles still had banks offering commercial financing to marginal borrowers. Marginal meaning that the borrower might not be quite ready to secure funding, but the banks were willing to make the loan happen. Not today. Today the name of the game is protecting assets first and foremost. With this in mind, a factoring company can play an important role to help revitalizing the troubled economy. Because accounts receivable factoring relies on the creditworthiness of the customer rather than the financial condition of the borrower, invoice factoring can be the best short term solution to accessing badly needed working capital. And invoice factoring can be obtained within days with relatively little amount of headache and paperwork.

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